2020/21 Reporting Season: six questions for year ends
24 November 2020: To help members think through how to approach the upcoming reporting season, ICAEW has produced a flowchart of six business questions (and accounting consequences) for 2020 year ends.
John Boulton, ICAEW’s director of technical policy, developed the questions with ICAEW’s Technical Strategy Board. He said the objective was to help surface some common issues facing businesses, to help them prepare numbers that best reflect their performance and position against a backdrop of enormous change.
“We understand this is a difficult time for business and people will be facing unprecedented pressure in reporting for 2020/21,” Boulton said. The point of this is to provide something accessible that serves as an introduction to issues shaping 2020/21 reporting, he added. “This is a tool to help businesses think through the challenges and identify the most important points to focus on for this reporting season.”
The flowchart suggests questions to start conversations in areas including cashflow, government support, assets and contracts. This is intended to help ensure they have been adequately addressed in the accounts. “We need to help people to navigate this because you can quite quickly get sucked into some detailed work and it can be difficult to keep perspective on what the big issues are.”
Accounting matters more than ever this year, Boulton says, because it is fundamental to a whole host of broader issues such as whether businesses are meeting their bank covenants, the impact on credit ratings, the implications for being able to pay dividends and the impact on executive remuneration. “It’s about thinking through the implications of any decisions you make,” he adds.
More than just helping to produce a robust balance sheet, the flowchart could prompt more fundamental questions about where revenue and cash are being generated and even the longer-term sustainability of the business. “This isn’t about having a crystal ball to be able to do a cashflow forecast for the next 18 months; it’s about really understanding the drivers of cashflow so you can start to build confidence around whether your business has a future,” Boulton says.
Meanwhile, the document highlights the need to understand government funding or other financial support that may have been received across a business. That’s important to ensure they comply with any conditions attached to funding and repayment terms together with any disclosures that need to be made in the accounts, for example, under International Accounting Standard 20, Accounting for Government Grants.
The impact of COVID on the use of business assets may also have reporting implications, Boulton warns. For example, if a business has premises that aren’t being used because of Covid, there may be implications for how you depreciate assets, or potentially impair them, or for valuing any inventory held there.
Similarly, contracts with suppliers and customers may pose questions in the current environment. In some cases, they may not be being enforced. “You might have leases for premises where you’re not paying the rent or people aren’t paying the rent to you. Although the contract says you’re entitled to £100k, realistically what does that mean?” Boulton asks.
Boulton stresses that the flowchart could be used as a tool for guiding potentially very challenging and difficult conversations with management or to prepare for the kinds of questions that might be asked by auditors.
Boulton stresses that the flowchart in its current format is very much a starting point for discussion on the kind of information that ICAEW members would find most useful to guide them through their reporting challenges. ICAEW is open to feedback from members over the next few weeks with the aim of producing more advanced resources in the New Year.
“Bearing in mind that accounts teams are going to be incredibly busy over the next reporting cycle, we want to do something that gets people out of the weeds and gives them back perspective. We want to have a dialogue with members to understand what kinds of things will be useful,” Boulton said.